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AT&T is having a hard time delighting investors lately. The stock has gained just 6.5% over the last two years while the S&P 500 index soared 36% higher -- and that's after adjusting for AT&T's generous dividends.
Does that make AT&T a terrible investment for new money today, or is the stock simply spring-loaded with two years of unrealized value creation? Let's have a look.
The bull case
This stock is cheap. You can buy AT&T shares today for just 10.6 times trailing earnings. It's a low watermark compared to AT&T's own P/E history, and a bargain-basement valuation marker all around.
When fellow Fool Bret Kenwell recently highlighted two down-on-their-luck stocks due for a rebound from their disastrously low P/E ratios, both of these stocks still looked expensive next to AT&T.
In other words, Ma Bell's shares are priced for absolute disaster. Simply bouncing back to 15 times trailing earnings, where this stock used to trade in 2011, would unleash a 40% value boost.
And it's not like AT&T is sitting still.
Besides fighting to keep up with innovative billing strategies and a budding price war in the smartphone market, AT&T is looking to extend its business into brand new arenas. The pending buyout of satellite TV broadcaster DIRECTV would be a game-changer.
The DirecTV deal would not bolster AT&T's fledgling North American TV business, where the U-Verse IPTV service accounts for just 11% of AT&T's annual sales today. Moreover, DirecTV is big in Latin America, where AT&T doesn't have a serious business at all.
So if the powers that be decide to approve the DirecTV buyout, AT&T will be exploring huge new markets at home and abroad. If that doesn't unlock some of the bottled-up P/E compression, I don't know what will.
The bear case
Those innovative pricing strategies I mentioned earlier? They're real, and they pose an actual threat to AT&T's core business.
In particular, T-Mobile US is stealing subscribers from AT&T and other telecom rivals, thanks to a barrage of Uncarrier policy changes.
AT&T has a tendency to follow T-Mobile's lead, introducing features like family plan data sharing and subsidy-free installment plans several months after the smaller rival introduces them. In the meantime, T-Mobile chips away at the bigger carrier's massive user base.
The DirecTV deal would do nothing to stem this tide. Rather, it's time for AT&T to lead by example, clawing back price-sensitive subscribers from smaller and hungrier rivals. Unfortunately, that type of innovation doesn't exactly run in AT&T's veins.
As for the satellite deal's revolutionary impact, it's hardly a sure thing. Regulators may still block the deal, like they stopped AT&T from acquiring T-Mobile three years ago. If the FCC and the Department of Justice take anti-merger action again, the market-stretching benefits listed under the bull case will be off the table.
Bull vs. bear: who wins?
So there are arguments to be made on both sides of AT&T's value equation. But in this battle of bull versus bear, I'm afraid that the big paws will take down the longhorn.
It's true that AT&T shares look mighty tempting from a pure value perspective, and even more so with a 5.5% dividend yield sprinkled on top. If everything works out the way AT&T's management and shareholders hope, new money today should deliver fantastic long-term returns.
But, there are too many shadows over this sunny outlook.
I'm not at all convinced that regulators will allow the DirecTV deal to close, removing AT&T's best shot at significant sales growth for the foreseeable future. And like I said earlier, AT&T doesn't have a great track record when it comes to developing consumer-friendly sales strategies of its own.
In other words, I see a large risk of AT&T shares becoming dead money -- even at today's heavily discounted valuation. The FCC might prove me wrong by green-lighting the DirecTV acquisition, and that's why you won't find me actively betting against AT&T with short sales.
But the risk-reward ratio here doesn't speak in AT&T's favor.
So is it time to buy AT&T, just weeks before all the telecoms report their latest round of quarterly results and subscriber additions? Only if you truly expect the DirecTV merger to get the final go-ahead, and even then, the value is undermined by the brewing wireless price wars.
Or, in other words, there are plenty of better places to put your money today.
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The article Is It Time to Buy AT&T Inc. Stock? originally appeared on Fool.com.Anders Bylund has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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